Remedial economics for the WSJ editorial board

An April 26 Wall Street Journaleditorial argued that "the overall tax burden grew more progressive" in the last 25 years because upper income taxpayers pay a larger share of total taxes than they did in 1979. But the Journal failed to explain why upper income taxpayers pay a larger share today: The wealthiest Americans earn a much larger share of total income than they did in 1979.

Using data from an Internal Revenue Service study by Michael Strudler, Tom Petska, and Ryan Petska, the editorial explains that between 1979 and 1999, the share of total taxes paid by the richest 0.1 percent of taxpayers rose from 5.06 percent to 11.05 percent, and the share paid by the top 1 to 5 percent of earners rose from 14.69 percent to 17.75 percent. But over the same 20-year period, the share of total U.S. income that these two groups earned increased much faster than their share of the tax burden, as economists Thomas Piketty and Emmanuel Saez explained in an updated version of their paper "Income Inequality in the United States, 1913-1998" (which now includes data up to the year 2000). In 1979, the top 0.1 percent of taxpayers earned 2.01 percent of total U.S. income; in 1999, they earned 6.63 percent. This group's share of total income more than tripled, while its share of federal taxes paid only increased by a little more than double. Similarly, in 1979, the richest 5 percent of taxpayers earned 20.83 percent of all income; in 1999, they earned 30.91 percent. This group's share of total earnings increased by about 50 percent, while its share of federal taxes rose only about 21 percent.

The relative share of total taxes paid by various income groups -- which the Journal cites -- is a flawed measure of actual progressivity in the tax code. Economists do not consider a tax system "more progressive" simply because high-income earners pay a larger share of total taxes. Rather, a tax system is "more progressive" if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up. In the online supplement (PowerPoint exhibit for chapter 12, slide 35) to the third edition of his introductory economics textbook, Principles of Economics (Thomson South-Western, 2004), N. Gregory Mankiw, who served as the chairman of President Bush's Council of Economic Advisers until late February 2005, defined the term "progressive tax" as "one for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers." The Journal presented no evidence that the U.S. tax system has become "more progressive" in this sense.